UPDATE 2-Stimulus measures, hopes of more lift European shares

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* German shares surge 3%

* Deutsche Bank, Bayer surge after Q1 results

* Lufthansa surges as minister in favour of state aid

* Italy to allow factories and building sites to reopen (Updates prices to close)

By Sruthi Shankar and Susan Mathew

April 27 (Reuters) - Airline stocks led European shares higher on Monday on hopes of state support, while upbeat earnings from Deutsche Bank and others added to optimism fuelled by signs that many countries will soon ease coronavirus-driven lockdown measures.

Shares of Lufthansa jumped 10.5% after Germany’s transport minister said he was in favour of protecting the airline company. Air France KLM advanced 0.9% following a 7 billion euro ($7.6 billion) government aid package.

German shares surged 3%, while the pan-European STOXX 600 closed up 1.8% after a modest fall last week.

With all eyes on central bank moves this week, the Bank of Japan pledged to buy unlimited amount of bonds to keep borrowing costs low as the novel coronavirus pandemic wreaks economic havoc across the globe.

The U.S. Federal Reserve’s decision is due on Wednesday while on Thursday, the European Central Bank is likely to signal more bond buying.

“The focus of Thursday’s meeting is to be on damage assessment and future policy decisions,” said Stephen Innes Chief Global Markets Strategist at AxiCorp. “Policy choices will probably come at the June meeting, but there is a chance that the ECB could announce some modifications to the tiering of the deposit system.”

The volatility gauge for euro zone stocks dropped to its lowest in nearly eight weeks at 34.7193, more than halving from its peak of 95.02 in mid-March.

But according to Refinitiv data, STOXX 600 companies are to record a 24.6% drop in first-quarter earnings, steeper than last week’s 22%, with consumer cyclical companies expected to take the biggest hit.

Milan-listed shares rose 3% after ratings agency S&P Global on Friday left Italy’s credit rating unchanged late on Friday, calming worries about a potential junk rating for the euro zone’s third largest economy.

Italy, among the countries worst hit by the virus, is set to allow factories and building sites to reopen from May 4.

“Country reopenings could anchor short-term sentiment provided the COVID-19 curve remains on a flattening tangent... We could see European equities catch up to the U.S. market this week as phase one bounce-back could be stronger in Europe than the U.S.,” said AxiCorp’s Innes.

The STOXX 600 has recovered about 25% from mid-March lows as policymakers inject trillions of dollars into the global economy, which has ground to a virtual halt due to the health crisis.

Planemaker Airbus was among the biggest drags on the benchmark after it warned 135,000 employees to brace for potentially deeper job cuts and said its survival is at stake without immediate action. (Reporting by Sruthi Shankar in Bengaluru Editing by Sriraj Kalluvila and Gareth Jones)